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2013 the best year on record for US pension gains; sponsors now acting to protect their winnings


United Kingdom , London


 

Funding levels of pension plans sponsored by S&P 1500 companies continued their run in 2013, with a further 2% improvement in December, resulting in a funded ratio (assets divided by liabilities) of 95% at the end of the month, up 21% for the year. Over 80% of pension underfunding has been eliminated since the beginning of the year. The collective deficit of $103 billion as of December 31, 2013, is down $454 billion from the estimated deficit of $557 billion as of December 31, 2012, according to Mercer. 

Equity markets enjoyed tremendous growth during the year with the S&P 500 index increasing approximately 30%. Yields on high grade corporate bond rates also rose, leading to a reduction in pension liabilities. The Mercer Yield Curve discount rate for mature pension plans rose almost a full percent over the year from 3.71% to 4.69%. For a typical pension plan with a duration of 12 years, this means liabilities will be about 12% lower than they otherwise would have been using last year’s discount rate.

“December was yet another present under the tree for pension plan sponsors, who were already having a great year with regards to funded status improvement,” said Jonathan Barry, a partner with Mercer’s Retirement consulting group. “We saw pretty steady improvement month by month, which has been driven by the combination of strong equity returns and rising interest rates. The 21% improvement is the best annual increase we have seen since we have been tracking this information, and the 95% mark is our highest year end result since 2007. This improvement should provide significant tailwind for 2014 earnings as pension expense is likely to decline significantly from 2013 levels.  

“Unlike in prior market cycles, we’ve seen many pension sponsors take steps over the past year or two to prepare for the conditions we’re seeing today.  They’re better prepared than in 2000 or 2008 to protect their gains, and we’re now seeing these preparation steps turn in to action.” said Richard McEvoy , leader of Mercer’s Financial Strategy Group.  Many of our clients have employed glidepath strategies where they systematically derisk their plans as funded status improves; we saw well over 100 funding level triggers hit during 2013 alone. In addition, 2014 is looking to be a big year for risk transfer strategies such as annuity buyouts and voluntary cashouts to former employees, as improving conditions make these options much more feasible than before.”

Mercer estimates the aggregate funded status position of plans operated by S&P 1500 companies on a monthly basis. Figure 1 shows the estimated aggregate surplus/(deficit) position and the funded status of all plans operated by companies in the S&P 1500. The estimates are based on each company’s year end statement  and by projections to December 31, 2013 in line with financial indices. This includes US domestic qualified and non-qualified plans and all non-domestic plans. The estimated aggregate value of pension plan assets of the S&P 1500 companies as of December 31, 2012, was $1.59 trillion, compared with estimated aggregate liabilities of $2.14 trillion. Allowing for changes in financial markets through December 31, 2013, changes to the S&P 1500 constituents and newly released financial disclosures, at the end of December the estimated aggregate assets were $1.85 trillion, compared with the estimated aggregate liabilities of $1.96 trillion.


Notes for editors

Unless otherwise stated, the calculations are based on the Financial Accounting Standard (FAS) funding position and include analysis of the S&P 1500 companies.

Information on the Mercer Yield Curve is available at http://www.mercer.com/pensiondiscount.

The Mercer US Pension Buyout Index may be accessed at www.mercer.com/US-pension-buyout-index


Mercer is a global leader in talent, health, retirement and investments. Mercer helps clients around the world advance the health, wealth and performance of their most vital asset – their people. Mercer’s 20,000 employees are based in 42 countries and the firm operates in over 140 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy and human capital. With 53,700 employees worldwide and annual revenue exceeding $10 billion, Marsh & McLennan Companies is also the parent company of Marsh, a global leader in insurance broking and risk management; Guy Carpenter, a global leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a global leader in management consulting. Follow Mercer on Twitter @MercerInsights